May 11 (Bloomberg) -- The U.S. agency overseeing offshore
drilling safety is also the government’s second-largest money
maker, a dual role being probed in hearings on last month’s
deadly oil-rig explosion in the Gulf of Mexico.

The Minerals Management Service generates about $13 billion
a year for the U.S. Treasury by partnering with companies such
as BP Plc and Exxon Mobil Corp. to develop oil and natural gas,
trailing only the Internal Revenue Service in revenue.

At the same time, the agency and its 1,700 employees
enforce safety rules, suggesting “inherent internal conflicts
of interest,” Senator Robert Menendez, a New Jersey Democrat,
said in an e-mail. Menendez and his colleagues on the Senate
Energy and Natural Resources Committee held the first
congressional hearing on the incident today.

Scrutiny of the Interior Department agency intensified
following the explosion that killed 11 workers, sank a $365
million drilling rig operated by BP, and triggered an oil spill
that threatens Gulf Coast states from Louisiana to Florida.

President Barack Obama’s administration today announced
plans to split MMS into one unit to inspect rigs and enforce
safety rules and a second to oversee drilling leases and royalty
collections.

The division of duties will let “the American people know
they have a strong and independent organization holding energy
companies accountable,” Interior Secretary Ken Salazar said in
a statement.

Trend Internationally

“That tends to be the trend internationally, to separate
the resource-management agency from the safety and pollution-prevention agency,” Elmer Danenberger, who retired in January
after 38 years in offshore regulation at the Interior
Department, told the Senate committee today. Splitting the MMS
“is something that is probably going to be looked at.”

The MMS failed to mandate certain safety devices required
on offshore rigs in other countries and allowed BP to drill in
5,000 feet of water without requiring a detailed environmental
analysis, said Kevin Book, a Washington-based managing director
for ClearView Energy Partners LLC, a policy research firm.

“The oil spill is the cost of having a relationship with
industry like the one MMS has,” Book said. “MMS by charter is
in the business of doing business with industry.”

Lamar McKay, chairman of BP America Inc., testified today
along with Steven L. Newman, chief executive officer of rig
owner Transocean Ltd., and Tim Probert, president of global
business lines at Halliburton Co., which was in charge of
cementing the well.

Pointing Fingers

The companies pointed fingers at each other in their
testimony.

“Transocean’s blowout preventer failed to operate,” McKay
said. The Transocean and Halliburton executives said BP had the
lead decision-making role in the project. The executives pledged
to cooperate to find the cause.

At least five congressional panels plan hearings on the
incident that began April 20. The Energy and Natural Resources
hearing was to be followed by a Senate Environment and Public
Works Committee session today.

Sex, Gifts

It’s not the first time the agency’s relationship with the
industry it regulates has come under fire. In 2008, Interior
Department Inspector General Earl Devaney found that MMS
employees in the division that gathers fees had sex with and
accepted gifts from industry contacts while failing to collect
almost $200 million due from energy companies.

The allegations led Salazar in September to scrap a program
that accepted payment of drilling fees in oil and gas instead of
cash, calling it “a blemish” on the department.

The 2008 allegations followed revelations by Devaney in
2006 that MMS failed to include terms in offshore drilling
leases that could have generated $10 billion in additional
revenue for the government.

The MMS, created in 1982, is “too cozy” with the
companies it regulates, said U.S. Representative Darrell Issa, a
California Republican. The relationship discouraged the agency
in 2003 from demanding better systems to prevent well blowouts
like the one spewing an estimated 5,000 barrels of oil a day
into the Gulf of Mexico, Issa said.

Issa has introduced legislation to separate the MMS from
the Interior Department and make it an independent agency like
the IRS.

Blowout Preventer

The explosion and sinking of the Deepwater Horizon rig
about 130 miles (209 kilometers) southeast of New Orleans opened
leaks 5,000 feet underwater.

BP’s McKay in his testimony pointed to the blowout
preventer, a device intended to stanch the well, which failed in
the initial phases of the accident. Backup systems such as a
dead man’s switch that is supposed to respond when its signal is
lost, and remote-controlled underwater robots, have failed to
activate the device.

“We were working on the belief that the failsafe, if
everything else didn’t hold the pressures, that blowout
preventer would close,” David Nagel, executive vice president
of BP America, said yesterday in a briefing with reporters.

Exclusion Given

The MMS gave BP a “categorical exclusion” from the
National Environmental Policy Act in 2009, which released the
company from preparing a detailed environmental assessment for
the well. BP’s exploration plan called the prospect of an oil
spill “unlikely.”

In a 2000 safety alert, the MMS warned that backup systems
to activate blowout preventers were “an essential component”
of deepwater drilling. Three years later, a consultant for the
MMS said an acoustic system mandated by Norway and Brazil that
can be triggered by encoded signals sent through the water, was
too costly and untested in the presence of a mud of gas plume.

“It’s not a clear case that they should have mandated the
acoustic sensor,” said Kenneth Arnold, an offshore energy
consultant based in Houston who helped write a 1990 report on
the MMS offshore inspection program.

Federal Lands

If research showed that systems to activate a blowout
preventer weren’t foolproof, the MMS should have demanded that
the industry spend “hundreds of millions, perhaps billions of
dollars” to develop something better in return for access “to
these very profitable federal lands,” Issa said.

Even industry allies such as Representative Joe Barton of
Texas, the top Republican on the House Energy and Commerce
Committee, say stricter regulation may be necessary.

“I’m not satisfied with the answers,” he said after
meeting BP executives May 4. “Those of us that support offshore
drilling have to be open to the possibility that we have to
toughen up a bit.”